President Trump On Canada He Will Reduce Your Taxes

The news coverage both in the U.S. and Canada after the November 8, 2016 U.S. Presidential election reminds me very much of the news coverage of the stock market crash/financial crisis of 2008 and 2009. The vast majority of newspapers and TV coverage back then and now is overwhelmingly negative. My unofficial guesstimate is that there are about 20 negative reports for every one positive in the new U.S. government. For those that lived through the 2008-2009 recession you may recall the sheer panic of the public from the media trying to say that the investing world was ending and things would never be the same. We would have all been broke and destitute if all this media hype were true.

The main purpose of this article is to point out the many positive things that are most likely to flow from the U.S. to Canada based on the new U.S. government being run for the first time in recent history by a business person rather than a career politician.

I am a dual citizen living in the U.S. with a business operating in both Canada and the U.S. with our corporate entities focused on helping Americans living, working or doing business in Canada or Canadians doing the same in the U.S. We have several Canadians working in our U.S. operation and at least one U.S. citizen working in our Canadian operation. Consequently, it is very important for us to understand the effect this current overwhelmingly negative media has on the general Canadian/U.S. public who is trying to separate fact from fiction, real news from fake news. As during the financial recession, many people were making personal decisions based on puffed-up but negative media coverage which is just as dangerous as trying to make rational conclusions based on the current negative media. Those that panicked in the financial recession were the ones that were the most hurt rather than taking advantage of the best buying opportunity in many decades. I believe those buying into the negative media rather than looking for opportunities will similarly be harmed when we look back on this time period.

The first opportunity which I feel will likely be the most positive impact for Canada is that income taxes could be reduced quite substantially, particularly for Canadian businesses. The U.S. tax reform in progress has mandated a 15% tax on both large and small businesses. This is an incredible tax reduction that brings the U.S. from amongst the highest tax on incorporated businesses in the world to close to the lowest. So, what do I think that will mean for Canadian businesses? I believe both the Canadian federal and provincial governments will reduce the corporate taxes combined to approximately this same 15% level. This would mean Canadian businesses, particularly with the lower Canadian dollar could still be very competitive and would have more after-tax capital to reinvest back into their businesses to create more jobs and make more capital investments in equipment and buildings. All of which would be great for the Canadian economy. Ontario Premier Wynne has already made commitments to reduce Ontario corporate taxes, and Prime Minister Trudeau didn’t finish off his March 2017 budget. He was waiting until he was able to see what the US was doing so he could adjust corporate taxes to keep Canada competitive in the fall budget updates.

The U.S. planned reduction of taxes on capital gains and dividends to max out at 20% variance brings advantages for Canadians who own property in the U.S. as they will pay less U.S. taxes on the sale of the property. Those Canadians living in or moving to the U.S. will find that tax on dividends cuts taxes to roughly half of what they would pay in Canada even after dividend tax credits and their capital gains are cut by roughly 20% from the tax rate in most provinces.

Although the U.S. has not set the income thresholds for their new tax brackets they are reducing the number of tax brackets from seven down to three, 10%, 25% and 35%. What this means for most Americans and Canadians who qualify for paying the taxes in the U.S., is that a married couple with a couple of young children and a mortgage on an average house would pay $0 of income tax until their taxable total income approached the equivalent of CDN $100,000 or even higher if you included RRSP and charitable deductions. Those U.S. taxpayers fortunate enough to be in the top brackets and living in those U.S. states that have low or no state income tax are expected to see average tax rates around 20-25%. Not too much different than they are paying now. U.S. citizens living in Canada will get a couple of major advantages besides simplification of their U.S. tax filings. They will not be subject to the 3.8% Affordable Care Act health insurance tax which will help many U.S. citizens in Canada who have large investment income as this was essentially a double tax because there were no foreign tax credits allowed against this tax for taxes paid to Canada.

The Canadian carbon tax imposed on all provinces, except for Ontario and Québec because they already have a cap and trade system which is very similar, has started in January and will continue to increase substantially annually. As the carbon tax rate grows it will continue to make Canadian businesses less competitive with the U.S. Consequently, I believe that with President Trump’s active deregulation, opening more federal lands to oil and gas activity, projects such as the Keystone XL pipeline, and drilling in the Arctic, that this will put pressure on the Canadian federal government to curtail their desire to increase the carbon tax from its current level to five times as planned over the next few years. Canadians may benefit greatly through reduced emissions-type taxes. In addition, with more opportunities in the U.S. for Canadian oil and gas or pipeline companies, there may be substantial increase in employment to offset Alberta’s disastrous high unemployment in that industry.

The final controversial item that I believe will eventually be substantially helpful to Canada is The North American Free Trade Agreement (NAFTA). Originally called the Canada-United States Free Trade Agreement, which came into effect on January 2, 1988. This agreement was superseded by NAFTA in 1994, and broadened to include Mexico. This agreement is very outdated and has been in dire need of updating for many years. If you think back to 1989 the Internet was barely a twinkle in Al Gore’s eye. Google, Facebook, Twitter and other household name companies were not even formed yet. Apple, now the largest company in the world had barely introduced the first Mac. There have been many new occupations and industries created, old ones eliminated or updated, and the entire world economy has changed immensely. As a result, NAFTA has not been doing as effective a job as it could be if it was updated to the current state of the North American economy. An update has been past due for some time so if the three countries get together and they all act in their individual country’s best interest while respecting each other needs an updated deal can be struck that will increase trade and employment in all three countries over current levels. For Canada and the U.S., the soft wood lumber dispute and dairy disputes should be cleared up which could mean a couple of major benefits to Canada in the form of lower prices on dairy products and lower greenhouse gas emissions. The magnitude of the greenhouse gas reduction, quite ironically, could easily have a more measurable effect than the Prime Minister’s carbon tax/cap and trade because it may leave millions of trees living in the Canadian Crown lands rather than been harvested and sold to build U.S. houses. Regardless of the banter back and forth between the various governments, Canada and the U..S are each other’s largest and best trading partners and that is very unlikely to change regardless of what government is in power in Canada or the U.S.

The jury is still out whether President Trump and his business experience will ever be able to effectively run the U.S. and “Make America Great Again”. The task is enormous and even the President himself has admitted that the job is substantially harder than he expected and the swamp is much deeper and much wider than he had planned. In any effect, we live in interesting times and hopefully all the effects of the new government will yield such positive results that we can actually take a bite out of the incredible $10 trillion of debt with which the last government left the U.S. citizens.

Robert Keats, CFP, MSFP, Keats, Connelly & Associates, Author of "The Border Guide", Phoenix, AZ

Email: bobk@keatsconnelly.com